The second part of the series “Gas, War and Europe” looks at the latest developments on the energy crisis triggered by the War in Ukraine, its current impact in Europe and the possible future scenarios. For this, the article delves into the institutional response given by the European Union (EU), the evolution of imports and energy suppliers as well as the challenges ahead.
By Adrián Merino Puente
Despite the open weaponisation of the European energy dependency by Russia and the calls to prepare for widespread shortages and even outages, the continent has managed – for now – to weather one of the biggest economic, social and political storms it has ever faced. In this sense, the EU managed to reduce gas demand by roughly 12% in 2022, with significant reductions in the last quarter of the year of around 20% [1]. Similarly, after the summer peak, the gas prices experienced a progressive collapse extended to the first months of 2023 [2].
The generalised reduction in demand and prices was made possible by the convergence of several factors raging from climate to brand new policy-making efforts. Precisely, mild temperatures during the autumn and the beginning of the winter postponed the beginning of the heating season – key to delaying the seasonal increase in gas consumption – and allowed more leeway to increase the gas storage. Similarly, the wet – not in Southern Europe – and especially windy weather in large parts of Europe allowed for a greater contribution of the wind and hydroelectric energies [3].
This lucky break with the weather was also coupled with fears of an economic recession and changes in energy consumption patterns – which dragged down energy demand –, extensive Liquefied Natural Gas (LNG) imports, diversification of suppliers and a series of short and medium-term measures promoted by the EU [4].
However, Europe still faces a potentially uncertain future for the next two winter seasons. The margin for reducing consumption is becoming increasingly narrower, while the recovery in global energy demand will create further pressures. Moreover, the early or late arrival of cold weather will again be a key factor.
A not-so-secure and diversified supply
With the aim of facing the energy crisis, the European Commission presented in May 2022 the REPowerEU plan, a cross-cutting project focusing on developing a real European energy security through savings, diversification, clean energy as well as investments and reforms [5]. In terms of diversification and security of supply, REPowerEU has fostered the establishment of cooperation agreements with current and potential gas suppliers, in addition to creating the Enhanced Solidarity Gas Purchases mechanism for joint purchasing of gas and hydrogen and establishing the obligation for diversification [6]. In line with this, the EU Energy Platform Task Force was created to work with international suppliers and to coordinate voluntary gas purchases among EU member states [7].
In addition, the EU introduced several changes to existing regulations to rise the filling levels of gas storage up to an 80% before the 2022-2023 winter and 90% for the following winter periods until 2025 [8]. In this sense, although the 2022-2023 goal was met reaching a 96%, it is predicted that by the end of the heating season – march 31 – the levels will be around 55% [9]. This would require a further increase in storage level of around 40% in seven months, which could turn challenging as the scope for the increase in supply from within and outside Europe is very limited, as explained in the first part of the series [10].
However, Europe’s greatest ally in securing and diversifying its gas supply has been the LNG. In 2022, the EU experienced a 60% increase in LNG imports compared to 2021, an increase expected to be maintained by 2023, backed by the entry into service of regasification plants in Europe and other projects in Africa and America [11]. This has mainly been possible due to the fall in imports from China during 2021 and 2022, which has allowed Europe to capture a large part of the global supply. Chinese industrial activity – revived after the Covid-19 slowdown – will, nonetheless, potentially limit European access to LNG in a more stressed and competitive international market [12].
A limited European scope of action
In addition to seeking new energy suppliers, the reality is that the EU has little room for manoeuvre in the short-term. After the implementation of energy saving measures for industry and private consumers as well as the changes in consumption patterns due to high prices and social awareness, the possibility of further increasing savings is extremely limited. Furthermore, the contribution of alternative energies, although relevant, will be insufficient. Thus, it is estimated that the European nuclear power generation will increase by 2% in 2023 after a 20% fall in 2022 following the shutdown of numerous French nuclear power plants due to maintenance, in part thanks to the delay in the closure of plants in Germany and Belgium [13].
Additionally, the EU has complemented the above-mentioned measures with medium-term actions to promote clean energy through a widespread expansion of renewables, electrification as well as the replacement of fossil and fuel-based heat. The goal is to reach 45% of energy from renewable sources by 2030, an ambition that nevertheless leaves short-term energy needs unmet [14].
The convergence of all these factors could therefore lead to a potential supply-demand gap during 2023. This would be caused by a reduced baseline supply, weighed down by a total halt in Russian gas imports and increased competition with China over LNG, unable to reach the European average baseline demand.
Conclusion
Without any doubts, Europe has been able to successfully weather the storm of the energy crisis during this winter. Saving and storage measures along with the diversification of suppliers through LNG have made it possible to overcome Russia’s search for strategic advantage by exposing the continent to shortages and skyrocketing prices. In addition, the medium-term measures focused on renewables, efficiency, and consolidation of alternative suppliers are a key step in ensuring energy sovereignty – or at least not dependency – for the future.
However, as long as the war in Ukraine continues, the Russian weaponization of energy will remain, creating new challenges with the arrival of the following winters, and in this context the ability of the EU to cope with them is not that clear. The end of imports from Russia has meant the entry of Europe – as a consumer – in alternative markets already supplying large economies such as China, which will create further competition for energy. Moreover, the scope for further energy saving is very limited while the weather, so far mild, is likely to vary generating more pressure on energy production and saving.
References
[1] Ben McWilliams and Georg Zachmann, “European natural gas demand tracker,” Bruegel (February 2023) https://www.bruegel.org/dataset/european-natural-gas-demand-tracker#:~:text=In%202022%2C%20we%20estimate%20that,%2C%20and%20December%2013%25%20lower.
[2] Otilia Dhand, Katarina Maaskant and Tim Bogaert, “Weathering the Storm: EU responses to the 2022 energy crisis,” Teneo (January 2023).
[3] The Economist, “The energy crisis and Europe’s astonishing luck,” The Economist, January 11, 2023, https://www.economist.com/finance-and-economics/2023/01/11/the-energy-crisis-and-europes-astonishing-luck.
[4] Martin Lambert, “Key Themes for the Global Energy Economy in 2023,” The Oxford Institute for Energy Studies (January 2023).
[5] European Commission, “REPowerEU actions,” European Commission (May 2022).
[6] European Commission, “REPower the EU by engaging with energy partners in a changing world,” European Commission (May 2022).
[7] Dhand, Maaskant and Bogaert, “Weathering the Storm: EU responses to the 2022 energy crisis.”
[8] Dhand, Maaskant and Bogaert, “Weathering the Storm: EU responses to the 2022 energy crisis.”
[9] Nora Buli and Bozorgmehr Sharafedin, “Analysis: Healthy gas storage warms Europe, but not enough,” Reuters, February 23, 2023, https://www.reuters.com/world/europe/healthy-gas-storage-warms-europe-not-enough-2023-02-23/#:~:text=After%20a%20Herculean%20EU%20effort,heating%20season%2C%20on%20March%2031.
[10] Mike Fulwood, Anouk Honoré and Jack Sharples, “REPowerEU and the Short-Term Outlook for the European Gas Market,” The Oxford Institute for Energy Studies (July 2022).
[11] Georg Zachmann, Giovanni Sgaravatti and Ben McWilliams, “European natural gas imports,” Bruegel (March 2023) https://www.bruegel.org/dataset/european-natural-gas-imports.
[12] International Energy Agency, “How to Avoid Gas Shortages in the European Union in 2023,” International Energy Agency (December 2022).
[13] International Energy Agency, “How to Avoid Gas Shortages in the European Union in 2023.”
[14] European Commission, “REPowerEU with Clean Energy,” European Commission (May 2022).
